New Nuclear Generation: Ratings Pressure Increasing

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Of note:  analysis contains a detailed summary of credit downgrades associated with the last waves of nuclear reactor construction.

While nuclear power remains a thorny political and policy issue today, the concept of building new facilities has gradually reawakened in recent years, offering a buffer against foreign energy dependence, unpredictable commodity prices, and heavily polluting fuel sources. As a result, several of the largest U.S. power companies in recent years have announced plans to pursue new nuclear generation.

This may eventually boost the country's options for power generation.  But from a credit perspective, the risks of building new nuclear generation are hard to ignore, entailing significantly higher business and operating risk profiles, with construction risk, huge capital costs, and continual shifts in national energy policy. Project risks are somewhat more clear today than during the last build cycle, in the 1970s, since we now have a track record that measures nuclear power's operating performance; strong plant economics due to low fuel cost; proven efficient and safe operating capabilities; new and refined regulatory procedures; and more certainty over reactor designs before construction begins.

Less clear today is the effect that energy efficiency programs and national renewable standards might have on the demand for new nuclear generation. National energy policy has also begun eyeing lower carbon emissions as a key desire for energy production-theoretically a huge benefit for new nuclear generation-but the price tags associated with these development efforts are daunting, especially in light of today's economic turmoil. It isn't clear what effect such shifts, or changes in technology, will have for new nuclear power facilities.

Credit conditions are yet another question. Few, if any, of the issuers aspiring to build new nuclear power have meaningfully strengthened their balance sheets, and for several companies, key financial credit ratios have actually declined. Moreover, recent broad market turmoil calls into question whether new liquidity is even available to support such capital-intensive projects. (The U.S. Nuclear Regulatory Commission's (NRC) first Construction and Operating Licenses, or COLs, are expected to win approval in roughly 24-36 months, after which investment in these projects could well increase significantly.)

Moody's is considering applying a more negative view for issuers that are actively pursuing new nuclear generation. History gives us reason to be concerned about possible significant balance-sheet challenges, the lack of tangible efforts today to defend the existing ratings, and the substantial execution risk involved in building new nuclear power facilities.